As a marketing-centric web designer, I often find myself explaining to prospects and clients about how “web design” (when done right) is actually more about “marketing” than design.

The problem is that many small business owners don’t know where to begin when it comes marketing their business and tracking their efforts. They shoot from the hip, trying different things, not ever knowing what the return on investment actually is.

As a business owner you don’t also have to be a marketer, but understanding a few important metrics about your sales funnel can help you direct your efforts sensibly, without throwing your money away on advertising that doesn’t bring a return.

What is a Lead?

In marketing terms, a lead is any person or entity (as in a business) that is potentially interested in purchasing your product or service. Some leads are going to be better than others.

A “hot lead” might be more qualified (more ready to buy) than say a “cold lead” that needs more convincing before pulling the trigger. For this reason, a hot or warm lead would be understandably more valuable to you than a cold lead… But how valuable?

We’ll explore the value of a lead more in-depth in a bit, but first let’s talk about conversions.

What is a Conversion?

A conversion is any action that you define. It could be a purchase, an old fashioned phone call, contact form submission, newsletter signup, social share, a specified length of time a visitor spends on a web page, playing a video, a download, etc.

Many of the small businesses that I meet only have a gut-sense of where their new business comes from because they haven’t been tracking conversions.

Knowing your conversion rate(s) is a first step in understanding how your sales funnel is performing and what marketing avenues are giving the greatest return on investment (ROI).

Conversion Rate and How to Calculate It

Once you have defined what conversions you want to track, you can calculate the conversion rate. For the purposes of the following example, let’s call a conversion a sale.

Even if you’re still in the dark ages without a viable website, as long as you are tracking the number of leads you get and the number of resulting sales (conversions), you can calculate your conversion rate like so…

Conversion Rate = Total Number of Sales / Number of Leads * 100

Example: Let’s say you made 20 sales last year and you had 100 inquiries/ leads. Your sales to lead conversion rate would be 20%.

Conversion Rate = Total Number of Sales / Number of Unique Visitors * 100

Example: If you made 20 sales in a month and you had 2,000 unique visitors to your site, your conversion rate would be 1%.

What is The Value of a Lead?

The value of a something, is what it is worth to you. If you sell lawn irrigation systems at an average price of $2,000 installed and you turn a lead into a sale, then that lead is worth $2,000 to you.

However, we know that not every lead you get will end in a sale. In reality you might only turn two out of 10 inquiries into a sale. That would make your conversion rate 20% (2/10 * 100 = 20).

That means you can expect to generate about $4,000 from your 10 leads (2 sales @ $2,000 ea). That’s because we know on average you are closing 2 out of 10 sales, a 20% conversion rate. This means that the value of one lead is actually $400 (4,000/10).

Here’s the formula:

Lead Value = Value of Sale / Number of Leads

The previous example is a bit simplistic and you can get much deeper with this stuff. As we discussed earlier, some leads will be more qualified than others and we will also want to look at what the actual profit is – not just the revenue. More on that in a minute.

Why The Value of a Lead Becomes Useful

When you know what the value of a lead is, you can determine how many leads you need each month to sustain your business and how much you should pay for advertising. This is true whether you are using pay-per-click (PPC) or any offline advertising like mailers or print ads.

Conversions Needed = Desired Revenue / Lead Value

Example: Let’s say you need to generate $15,000 per month to float your irrigation business. Based on your conversion rate of 20% (2 sales / 10 leads x 100 = 20) from the previous example, you already know that each lead is worth about $400 (4,000/10).

This means, you would need about 37-38 leads per month (15,000 / 400 = 37.5) to make about 7-8 sales ($2,000 ea) and generate $15,000 in revenue.

(Note: This is a very simplistic example using revenue generated. A more accurate option would be to use the profit generated by sales and not just the revenue, but many businesses have difficulty defining this number so we use revenue as a guide.)

Example: If each sale of $2000 actually costs you $1000 to deliver, the profit on each sale is really $1000. To get a return on your advertising spend you’ll actually need to generate 75 leads to reach your $15,000 monthly goal.

The math:

1 sale = $1000 profit

Conversion rate = 20% (2/10 * 100 = 20%)

Average lead Value = $200 ($1000 * 20%)

Leads needed = 75 ($15,000 / $200 = 75)

Even if you use revenue instead of actual profit, as long as you are constantly tracking these metrics, you will be able to make much more informed decisions.

Understanding your sales funnel, can help you determine the number of leads you need to get each month, how much you can safely spend on advertising and what you can expect in return.

How to Leverage Lead Value to Your Advantage

In the business world things aren’t always so simple. Not all sales are going to be equal. Some sales will be a homerun and others won’t.

Also, the conversion rates are going to be different depending on the traffic source. You may find that leads generated by paid search convert better because you’ve been hyper-focused on your advertising, using keywords with extremely high commercial intent and/or targeting customers that are very local to you.

So with an average order value of $2000 you might see something like this:

This shows that the value of a lead may be different depending on the lead source.

From this, you can see that a lead generated from your paid search campaign is worth more to you than a lead generated from organic search.

If you have Google analytics installed on your site (and you should) you can determine the average lead value and enter this into your analytics goal, then Google Analytics will do most of the hard work for you.

If you just stuff the average revenue value into the goal value, you’ll see highly inflated numbers that won’t make sense, as not every lead generated from the website will actually result in a sale.

Using a realistic lead value as your goal value will give you a clearer insight into how your website is performing.

Resources

Here’s a Google spreadsheet that I share with my clients so they can track leads. You’ll need to have a Google account if you want to make a copy and save it for yourself to use.

Awesome content. I’m a little slow so please bare with me lol. Let’s say you have a $37 product and you want to make $3000 a month from it. How do you calculate how much traffic you need to get that number? Thank you.

Thanks for the kind words Peter. First, before you can make that calculation, you need to know how well your site is converting those visits into sales. You need to know the conversion rate. Conversion Rate = Total Number of Sales / Number of Unique Visitors X 100. Once you know that number you’re on your way. Assuming the $37 item does not have any manufacturing costs associated with it, you would need to sell around 81 of those to make $3,000. ($3,000/$37 = 81). Let’s then assume that you figured out your conversion rate to be 2% (2 sales for every 100 visitors). So your answer to your problem would be phrased as, “2% of what number equals 81?” The answer to that is 4,050 visitors. You can see how I made the calculation using this nifty tool.

Quick question, how should I calculate the conversion rate of #of Conversion with the Value Of Conversion. Like saying an agent made 4 hotel bookings and the total value of the 4 hotel bookings is $26,696.28 How can I calculate the conversion rate? Please help..Thanks!

In order to calculate the rate of conversions you also need to know the number of leads. For example, if you had 10 hotel inquiries and only 4 of those turned into sales, then the conversion rate is 40%.

If i wish to analyse lead to sales conversion rate month-wise, then do we need to introduce ‘time’ factor e.g. conversion rate for november would be Total Number of Sales (closed in November ) / Number of Leads ( generated in November) * 100.
However the leads converted to sales in November may not have been generated in the month of November. Would this factor make considerable difference ?

Your question is too broad. There are so many variables affecting conversion rate. You can’t really say the average conversion rate for a real estate sale is X. Not all realtors are created equal. One business might have more leads that another. That would affect conversion rate. One business might have better sales agents then another. That too would affect conversion rate. Demand or the lack of it would also be a factor. And the list goes on.

You have to be clear on what you’re measuring. Are we talking about on-site (visitor to lead) conversion rate or offsite (lead to sale) conversion rate? Lot’s to consider.

Woooooohhh!!! great article, I’m presently developing a report within a Telecoms Industry and it has capture the attention of my Bosses after explaining to them the preliminary stages, they are looking forward to its completion. will be communicating with you using actual figures to complete my project……Thank You Once again. I called the project ‘BUSINESS HEALTH ANALYTICS’ as I’m reporting from the Revenue Assurance Department.

The premise around this analysis is to measure the Conversion Ratio from Deferred Revenue driven by Sales versus Reload behavioral pattern of Subscribers showing the Number of days taken for a subscriber to utilize their Balance. Analytics is feed by the workings that shows the health of the Business from End-to-End.

How can I sort consultants ranking by looking at the number of leads received in RELATION to the number of leads received. We have 18 consultants and if person 1 received 10 leads and converted 5 it’s 50% and the same for person 2 who received 50 leads and converted 25 is also 50%. It means that person 2 dix better, so I want to give them leads based on performance in relation to the number of leads received. Please can anybody help

The problem here is that just looking at the conversion rate doesn’t give you enough information from which to make sensible business decisions.

When deciding which metrics to track you must understand why you’re tracking them and how they’re going help inform your decisions.

So what is important when you’re comparing your consultants?
There are potentially a lot of variables in play here.

How successfully is the consultant converting their leads. – Beware that this isn’t just measuring the effectiveness of the consultant, but also the difficulty of converting the leads. (Not all leads are equal)

You also need to consider the value of the lead. I don’t know if in this case each lead has the same value or a variable value. You’ll want to make sure you understand the true value of a conversion though. 25 conversions is almost certainly going to be worth more than 5 conversions (unless the value of these 5 conversions was worth more than the value of the 25 conversions!)

When comparing the performance of these consultant you’ll want to look at:

*Total number of leads/consultant
*Total number of conversions/consultant
*Lead conversion rate/consultant
*Total value of conversions/consultant
*Average value of conversions/consultant (if the value of each conversion varies)

In itself this still doesn’t provide all the answer. You need to track this information month by month to look for trends.

Instead of looking at just the individual metrics, you need to dig into why, eg: “why did consultant x’s conversion rate fall this month,” “why does consultant z manage to convert at a higher rate. Are they doing something different or are they getting a different quality of lead?”

You might find that if a consultant spends more time/lead they have a better conversion rate, but obviously limits the number of leads they can pursue in a month. Where is the sweet spot?

By understanding the different factors that are influencing your consultants performance you can put together a plan to improve their effectiveness and track their performance over time.

Hi. I need some assistance. I read your article and it was very helpful.
I’m in a cram bc I’m in digital marketing but my VP doesn’t establish any conversions any tracking etc. I was challenged to get this together.
The CEO wants 50 leads a month.
What formula or how do I show: if we do xyz we will get 50 leads a month..

Assuming we are just talking about web leads, the first step is to establish what a conversion is to your organization and start tracking those now. If it’s as simple as a contact form submission, then setup that goal in Google Analytics and start tracking that data asap.

Though you said you have not been tracking conversions to date, it sounds like you have some idea of the average number of leads/month. We’ll call a lead a conversion for purposes of this conversation. I would use your average number of leads as a rough estimate to establish your current baseline conversion rate. In your case, conversion rate = Total Number of inquiries / Number of Unique Website Visitors * 100. (If your leads are not coming from website visitors, then you need to establish where they are coming from and how many per/mo.

Without knowing the “xyz” of what you are doing to increase leads, and without knowing how those variables have impacted the flow of leads in the past, there is no real way to project the influence of such variables for the future.

For website leads, we need to look at which traffic is converting. Is it referral traffic from a specific website? Or maybe it’s organic traffic to a specific page on your site? Or perhaps it’s a PPC landing page? facebook advertising? or maybe an email campaign? There are many possible channels for leads.

It’s important to note that increasing your number of leads is meaningless if the leads are crappy leads. Then you wasted your resources generating leads that didn’t turn into paying customers and you’re CEO will likely not be too impressed.

Thanks for your content. I am not going to beat around the bush. I am horrible at math. Now with my new position i have to convert rates at the end of each month. I have had it explained to me in so many different ways and all are not helping me. say I have 43 referrals and 20 admits how would i figure out the conversion rate for this?? i appreciate this in advance.

Samantha, in your case the formula is 20/43 * 100 (thats 20 divided by 43 times 100). Your answer is 46.5% … thats your conversion rate. You are converting a little less than half of your referrals into “admits.”

Hi there, i’m a little slow here to catch but if (Lead Value = Value of Sales / Number of Leads), how did you get $200 for the table? I’m assuming Lead Value and Avg Lead Value is different if that is the case.

As per table, in the 2nd column, I used (Lead Value = $4000 / 10), making the lead value at $400. Did you take the lead value and divide it by two (assuming average is dividing equally) or rather what did you use to get the avg value?

If you did divide the Lead Value by two, how can I come up with the value in the first column?

Firdauz, You are not slow. As a matter of fact you are sharp. Thanks for pointing out that error in the chart. There were a few numbers that were off. Your calculations are correct. I’ve amended the chart so it should now make sense.

excellent information on determining how to put a dollar amount on each lead. This is also an excellent way to verify how productive your sales staff is both individually and as a group. I would love to add a link to your article from my linked in page, I know it helps me and I believe it is a simple but often times over looked tool for the average sales person to sharpen and adjust their skills over time.

I am trying to figure out what is the impact on conversation rate by adding an additional sales channel.

For example if my current conversion rate is 15% only using a channel like in person, but i have statistics that show 19% of people want to use an online channel. If i provided an online channel what would be the impact to conversion?

The “statistics” you mention of 19% are just that, they are statistics … numbers used for the purpose of “inferring proportions in a whole from those in a representative sample.” So the 19% number you mention would have no actual baring on your conversion rate per say.

That said, if you were to provide another marketing channel, (like an online channel) your conversion rate could be tracked in different ways depending on what you’re interested in knowing. If your conversion goal is the same for each channel (sale of your product or service) then you could lump all of the leads and sales figures into one formula. If you want to track and compare conversion rates for “in person” conversions and “online conversions,” then obviously you would not lump all of the figures into one formula.

Keep in mind, I have no idea what you are selling, but my guess is that you would likely want to track these two types of conversions separately so that you could better understand how to improve each sales funnel.

For example, the sales conversation or sales pitch for in-person prospects might differ slightly depending on the situation, the type of client and what you’re selling. Over time, you learn how to temper your sales pitch to address the prospect’s concerns and doubts. Understanding how this impacts conversions is critical to understanding how to improve your process.

That same conversation will have to be brought online and tailored slightly for each type of website visitor and the problem they are trying to solve. You’ll likely be very interested in what this conversion rate is so that you can tighten up your funnel as you better understand where people drop off and leave your site… but that is a whole nother conversation.

Wonderful article! I am developing a financial dashboard for my company. We are an architectural firm with proposals that range from $1500 to $100,000. I have been calculating our conversion rate by $$$ and not my the quantity. I did this because of the severity of the range in figures. We might write 25 proposals for $1500-$15,000 and one for $100,000 in a month. I am tracking all proposals by year they are written to when contracts are accepted in the year and using the dollar figures of $$$accepted/$$$total proposals.

My question is if we write a proposal now in September it may not be accepted until January. Do you think this would skew my figures? Or should I take a different approach ?

I’m sure you have your reasons for tracking your proposals in this manner. As you pointed out some businesses do have a longer sales cycle, which can make it challenging to track sales. The important thing is to understand why you’re tracking and what you’re going to do with the information. I’d be interested in understanding what kind of insights you’re hoping to glean from your tracking efforts.

We are tracking to see our conversion rate. It’s part of our financial dashboard and we compare the % approved by year and compare years and year to date to see if we have a problem or a problem in the industry. We honestly use it as an alarm to do some follow up on stale proposals. We are not high pressure sales we are professional services and want to ensure our efforts to write proposals is worth the effort. Also we want to build our clientele and have been writing proposals for new clients and want to see if our conversion rate if it increases or decreases. Our conversion rate is pretty consistent within a few percentage points and we can begin to project how many proposals we have to write or how much total fee we have to write to meet our growth expectations. Also for hiring needs and to project how many professional hours are required to service these contracts. The timing is the toughest part but we estimate future contracts based on the conversion rate multiplied by the total of pending proposals.

I think I would track the dates for the proposal and acceptance events, then instead of looking at 2015 conversion rates, I’d look at the last 90 days, last 120 days, etc. Excel/Google Sheets can do the date math. The date ranges would be rolling, and you could compare the past 120 days to the past 240-121 days, or year over year if you want. That’s if I’m understanding it correctly. Sounds like you should ignore calendar years and use a rolling range of days.

For instance, what percentage of proposals written 1/1/2016-3/31/2016 have converted as of 10/1/2016. Compare that with proposals written 10/1/2015-12/31-2015 that converted by 7/1/2016. Then you know if the rate is steady, or going up or down. Aside from seasonality, that should be an apples-to-apples comparison.

Does the value of sale need to remain constant? Let’s say we work with Enterprises so there is no real value of sale in a sense that a lot of the packages have different pricing. would i just average out all the value of sales against all the leads? just aggregate all the values?

the example you gave was a flat price of 2k. but what if there is not flat price. that’s what i’m saying. how would i find the lead value then? please answer!

As stated, some of the examples were in the article are simplistic and may not suit ever business’s need.The purpose of assigning a lead value and tracking your conversion rate is to help you measure the effectiveness of your marketing efforts and to set appropriate goals for the business regarding advertising budget, content creation, social media, etc. That said, if it makes sense to average out the value of all sales against all leads, then I would support that. You would at least have some a general guide to measure your success.

However, in your situation, you might have to segment your leads to get more meaningful insights. For example, if you know that vacation package 1 conversions are worth more to the business than vacation package 2 conversions, then you may want to create conversion goals in Google Analytics for these two goals and track those individually. Then of course, you would be looking at the advertising channels that are leading to the different types of conversions. This way you can decide which channels are producing the best quality leads.

This is a fantastic article. I was beating my head against a wall and then I found your page. THANK YOU!

My question refers to the segment where you mentioned the irrigation business figuring out how many leads it needed based on a goal revenue amount ($15k). I totally get that. However, I am in the fitness space where the majority of our transactions are recurring monthly “Subscriptions” or “Dues”, if you will.

Do you know how might I calculate my goal lead number when working with recurring revenue and growing that number over time? Would it make more sense to take the average yearly value of each sale?

Example: If I have $25k in recurring monthly dues this month and want to eventually reach a goal of $50K with average dues being $40/month, how many leads would I need to obtain at an 18% conversion rate ?

Any insight you could provide would be much appreciated.
Thank you for your time and talent! 🙂

You want to know, how many leads you need to reach an 18% conversion rate? However, we don’t know what your actual conversion rate is. Of those 625 paying customers you have each month, we don’t know many leads you needed to get those prospects to convert into paying customers?

To be accurate you’d need to know the churn rate – what percent of customers cancels each month. You need 625 new customers to get from 25k/mo to 50k/mo. Now, if you already had an 18% conversion rate, then you need, uh, …around 3,500 leads.

“In your opinion, which area should I focus on to have a better conversion rate?“

Which area of what? Conversion rate can be impacted by so many things. For example, a poorly designed website can negatively impact conversions. Weak copy and low search exposure can also have a similar effect. I’d need to know more to adequately answer your question.

The next calculation I’m looking to find out is my actual sale conversion rate, would I calculate my actual total number of opted-in leads that converted say it was 1,003 (opted-in leads) actually purchased my offer and divide it by the total 3,870 total visitors. If not, would it be by the total opted in amount, which in this case would be 2,010, to work out my sales conversion rate?

Thanks for the kind words. It’s tough to say what the “best path” is without knowing more specifics of what you’re trying to accomplish and how you will use the data. Both of those scenarios you outlined are correct, and both of those sales conversion rate numbers could prove useful (25.92% and 49.90%). Your overall sales conversion rate would be 1,003 / 3,870 x 100 = 25.92%. That’s the sales conversion rate for that traffic/lead source.

Assuming the “visitors” in your example are website visitors, then knowing that the opt-in lead conversion rate is 51.94% tells us that your opt-in offer has a high success rate. So your offer is well-aligned with your target market. That lead conversion rate can help you further optimize the first part of your funnel, the opt-in offer.

The opt-in offer qualifies your leads, but what happens between the opt-in and the sale is another matter. I would say that the second number (49.9% sales conversion rate) is more meaningful/useful for optimizing the second part of your funnel, the sales process. That would be the alignment of the sale item with the opt-in offer, at an appropriate price point.

Not sure if that’s the answer you were looking for. Data by itself is just data. The way the data is used is what gives it value.

How do you recommend calculating conversions that are delayed? We offer a 2-week trial, so often conversions don’t come through immediately. We run into a problem when it comes to reporting monthly ROAS, while trying to attribute each purchase to ads clicked 2+ weeks prior.

AdWords can still track that, if the visitor has the cookie from the first time they clicked the ad. But it would always be a 2-week delay in reporting, and if you made a change to the campaign you’d need to wait 2 weeks to see the results. So for example, with a two week trial, you might have conversions that are on the first and last days of the 14 day trial, so if you make a marketing change you really need to wait for the 14th day before you know the impact.